The Effect of Firm‐Level Investment on Income Inequality and Poverty Around the World

ABSTRACT We examine the relation between firm‐level investment and income inequality in an international setting. We find that firms' investments reduce income inequality and poverty. We document that increases in employment, compensation paid to employees, and labor productivity due to firms' investment activities can be the underlying drivers of the negative firm‐level investment and income inequality link. The impact of firms' investments on income inequality varies across industries and countries. The negative investment and income inequality relation disappears when credit markets are in distress and stock market participation is low. Our findings indicate that encouraging firm‐level investment can be a valuable tool for economic policymakers who aim to reduce income inequality and poverty.